STRATEGIC ANALYSIS REPORT – IKEA

Name: Teodora Randelovic

Student number: 18038944

Module: UOR322
 Executive Summary

Founded in 1943, IKEA has become one of the leaders in the global furniture

industry by providing customers with a range of quality, yet low priced products and

a unique shopping experience in its convenience stores with restaurants and

children play areas. Yet, when it entered China in 1998, IKEA faced large cultural

differences which have required the adaptation of its global strategy based on

standardisation to be able to sustain its competitive advantages in this market too.

For this reason, this report has identified key strategic issues for IKEA from

the external and internal environment, analysed IKEA's resources and capabilities,

and evaluated IKEA's competitive strategy in China to determine whether IKEA

addresses identified strategic issues of its business in the Chinese market. The

report also provides recommendations for improvements in IKEA’s resources,

capabilities and competitive advantages to be able to respond appropriately to future

changes in the environment.

 1

Table of Contents

1. IKEA’s strategic issues analysis............................................................................2

2. IKEA’s resources and capabilities analysis...........................................................5

3. Evaluation of IKEA’s competitive strategy.............................................................9

4. Conclusion and recommendation........................................................................13

References.................................................................................................................15

List of Tables

Table 1: Analysis of PESTLE factors...........................................................................3

Table 2: Analysis of Porter's Five Forces.....................................................................4

Table 3: Value chain analysis.......................................................................................6

Table 4: VRIO analysis.................................................................................................8

Table 5: SWOT matrix..................................................................................................9

Table 6: Critical success factors in the Chinese furniture industry..............................9

Table 7: Power/Interest stakeholder matrix................................................................12

 2

1. IKEA’s strategic issues analysis

Founded by seventeen years old Ingvar Kamprad in 1943, with the first store

opened in 1958 in Sweden, IKEA has become one of the leaders in the global

furniture industry with more than 500 stores in over 50 countries, 217,000 employees

and €39.6 billion in retail sales in 2020 (IKEA, 2021). Following a vision "to make a

better everyday life for the many people" and mission "to offer a wide range of well-

designed, functional home furnishing products at prices so low that as many people

as possible will be able to afford them" (IKEA, 2021), the IKEA Concept aims to

delight customers by providing them with a range of products and a unique shopping

experience in its convenient stores with cosy restaurants and children play areas

(Shoulberg, 2018).

Yet, when it entered China in 1998, IKEA faced large cultural differences in

this market (Whittington et.al., 2020, p. 231) requiring the adaptation of its business

model based on standardisation to be able to sustain competitive advantages. Thus,

IKEA is constantly monitoring the Chinese environment to identify and address key

strategic issues for the fulfilment of its mission, vision, and objectives (Whittington

et.al., 2020).

By analysing PESTLE factors (Table 1), IKEA identifies key drivers for change

in the Chinese macro-environment and determines which of them are the

opportunities and which threats to its business success (Grant, 2016). Although

there are several important strategic issues, like high rental costs or specific

customer preferences due to large cultural differences, the key strategic issues from

the macro-environment for IKEA are trade barriers, export licences, strict laws and

government regulations on foreign investment which prevented IKEA to enter the

 3

Chinese market independently. An additional, still current, key strategic issue from

the Chinese macro-environment is large cultural diversity.

Table 1: Analysis of PESTLE factors

Political factors

 A stable political environment, but some issues might become problematic, e.g.
Chinese and Taiwan political relations

 High corporate taxes, trade barriers, and government regulations to protect

domestic companies

Economic factors

 Although China has been recording rapid economic growth for years, it
currently faces economic slowdown, high uncertainty, and sales decline due to
the pandemic

 The second-largest furniture market in the world, after the US, which has been
steadily increasing for years

 Despite inequalities across the country, there is an increasing purchasing

power of the population

 Low labour costs, but high rental costs

Social factors

 The largest population in the world and increasing middle class

 Specific customer preferences due to cultural differences

 Great social differences between regions and urban and rural areas

Technological factors

 Rapid technological development and opportunities of advanced technology for

big-data analytics, digital marketing, and the smart home market development

 Chinese are tech-savvy and extensively use social media providing IKEA with
many opportunities for online sales and promotion

 Chinese social media and sales networks, like Baidu, Alibaba, Tencent, etc.

Legal factors
 4

 Strict laws on competition, labour rights, product quality, export licences, etc.

Environmental factors

 Environmental regulations and corporate social responsibility initiatives

The next layer in the external environment is the furniture industry in China

whose attractiveness IKEA assesses by evaluating Porter’s five forces (Table 2).

Table 2: Analysis of Porter's Five Forces

Bargaining power of customers – High

Besides great cultural differences, Chinese customers are characterised by great
expectations. While they demand high product quality at a low price, they also
have plenty of alternatives for furniture purchasing, which gives them great
bargaining power over IKEA.

Bargaining power of suppliers – Low to medium

Although IKEA has more than a thousand suppliers worldwide, which gives it the
power to influence the quality and price of raw materials, it also depends on them,
so they still have some power over IKEA. To ensure stable procurement, IKEA
builds good supplier relationships, but it also sets high sustainability standards for
its suppliers to ensure corporate social responsibility throughout its supply network
(IKEA, 2021).

Current rivalry – High

Since the Chinese market consists of numerous local furniture producers and
retailers, foreign brands and online retailers, the current rivalry is very strong.

Threat of entry – Low

Given trade barriers and strict Chinese government regulation, high initial costs
and business risks, but also due to brand equity and economies of scale of current
competitors, including IKEA, there are high barriers to entry for new competitors.

Threat of substitutes – High

Besides many Chinese competitors which offer various alternatives for IKEA's
 5

furniture, Chinese customers also have the option of online purchase, which is
very popular in China. Moreover, there is a constant threat of counterfeit due to
poor regulation in this area.

The key strategic issue from the micro-environment for IKEA is a strong

rivalry. Given a $32bn furniture market size and a 6.8% growth rate (IBIS, 2021), this

industry is very attractive consisting of more than 60,000 companies (GMA, 2021).

The market is also highly fragmented with a few large local competitors, such as

Beijing Easyhome Investment Holding Group, Macalline Group, Yuexing Group, and

Markor Furnishing Company (GMA, 2021). IKEA also faces foreign furniture brands,

mostly from Italy and Spain, and numerous online retailers. Moreover, due to poor

regulation and a lack of Chinese expertise in furniture design, IKEA faces a constant

threat of counterfeit.

Given that most large companies in China are state-owned and operate

through groups (GMA, 2021), they are financially strong, so IKEA also needs to

determine which of them use similar strategies that may endanger IKEA’s

competitive advantage (Whittington et al., 2020). Moreover, given the high

bargaining power of customers, as another micro-environment challenge for its

business, IKEA has changed its targeting and positioning. It has also narrowed its

target segment in China to younger customers of both genders from the middle-class

who live in urban areas and appreciate western furniture design (IKEA, 2021).

2. IKEA’s resources and capabilities analysis

To perform its business activities, IKEA needs to have the necessary

resources and capabilities to use the resources properly, but to achieve competitive

advantages, these resources and capabilities must also be distinctive, or valuable to

 6

IKEA, but rare in the industry, inimitable, and organised to create a superior

customer value (Grant, 2016). Moreover, to sustain competitive advantages in the

long term, IKEA also needs to possess dynamic capabilities, or the ability to align its

key resources and capabilities with changes in the environment (Whittington et al.,

2020).

Therefore, to determine a strategy, IKEA also needs to identify the strategic

issues from the internal environment. Thus, it evaluates its resources and

capabilities using Porter's value chain (Table 3) to identify internal strengths and

weaknesses and sources of competitive advantages (Whittington et al., 2020).

Table 3: Value chain analysis

Primary activities Support activities

Inbound logistics Infrastructure

 Vertical integration  Three divisions – franchise system,

 Good inventory management and range and suppliers, and industry

logistics  Culture of responsibility and initiative

Operations Human resource management

 A franchise system and joint venture  Training programs

 Production units worldwide  Employee engagement

 Strict procedures and controls  Career advancement opportunities

Outbound logistics Technology

 Distribution centres in key locations  Operational efficiency 

 Stores, online sales, and showrooms  Investment in R&D and digitalisation

Marketing and sales Procurement

 Strong brand image  Efficient supply chain management

 Catalogues, story-telling, in-store  Extensive supply network

 7

promotion, and showrooms  Sustainable sourcing and good

Service relationships with suppliers

 Speed, value, and good customer

relationships

Although IKEA operates through the franchise system globally, it entered

China using a joint venture to overcome business risks, cultural differences, and

government regulation on foreign investment (Whittington et al., 2020). IKEA’s

vertical integration, with own production, distribution, stores and product

development, enables it to keep cost and product quality under control but also

complicates IKEA’s infrastructure. The organisational culture of cost-consciousness,

responsibility and initiative, trained staff and innovative management have also

significantly contributed to IKEA’s success.

Yet, IKEA faced several strategic issues from the internal environment in

China, as what were its strengths worldwide, in China shown to be its weaknesses

due to China’s cultural specifics. For example, although IKEA's products are

considered low-priced worldwide, which is one of IKEA's main competitive

advantages, products were considered expensive in the Chinese market (Whittington

et al., 2020, p. 231), which endangered the successful implementation of IKEA’s

cost-leadership strategy. Also, its large stores in suburban areas, conceived by IKEA

as warehouses with showrooms where customers can choose furniture and

assemble it at home, were not in line with the preferences of Chinese customers

(Burt et al., 2020). Moreover, IKEA focuses more on traditional marketing channels,

like catalogues, story-telling and showrooms, while around 20% of the Chinese
 8

rather search and purchase furniture online using their networks, such as Baidu,

Alibaba, Tencent’s WeChat Store, etc. (GMA, 2021).

VRIO analysis (Table 4) has shown that IKEA has several sources of

sustained competitive advantage that come from its main strengths. Yet, it needs to

continue to innovate and adapt its business model to specifics of the Chinese market

to be able to sustain these competitive advantages. Moreover, given the economies

of scale and improved resources and capabilities of IKEA’s main Chinese and

foreign competitors, providing them with the ability to imitate it, IKEA also needs to

take actions to retain its temporary competitive advantages and competitive parity as

long as possible.

Table 4: VRIO analysis Inimitable

Organise
Valuable

Competitive
Rare

Resources and capabilities

d advantage

 Financial strength
Competitive
 Joint venture and franchise YES NO NO NO
parity
 Stimulating organisational culture

 Employee training and engagement Temporary

 Good supplier relationships YES YES NO NO competitive
 Sustainability and R&D investment advantages

 Brand image based on a combination

of low price, quality products, and
unique stores Sustained
 Vertical integration, efficient supply YES YES YES YES competitive
chain, and large production capacity advantages
 Global experience and adaptability
 Innovative management
 9

Thus, to achieve these objectives and address identified strategic issues,

IKEA has introduced changes in its business model and adapted its strategy to the

Chinese market.

3. Evaluation of IKEA’s competitive strategy

Based on the above analyses, IKEA creates the SWOT matrix (Table 5) and

identifies critical success factors in the industry (Table 6) to evaluate a chosen

strategy for the Chinese market using the SAFE criteria - suitability, acceptability and

feasibility.

Table 5: SWOT matrix

Strengths Weaknesses

 Strong brand image  Dependence on Chinese suppliers

 Vertical integration and joint venture  Focus on the DIY system which is

 Production and supply chain not developed in China

efficiency  High price for the Chinese standards

 Global experience and adaptability  Focus on traditional marketing

Opportunities Threats

 Opportunities of advanced  The economic slowdown and

technology uncertainty due to the pandemic

 Growth of the furniture market,  Fierce competition, the fragmented

middle class and urban population market, and counterfeit

 Growing purchasing power and  Specifics of the Chinese culture and

demand for westerns products customer preferences

Table 6: Critical success factors in the Chinese furniture industry

 10

Critical success factors

 Differentiation based on brand image, product quality, or low price

 Product and store customisation, and sustainable sourcing

 Online promotion and sales on the Chinese social media and sales networks
with simultaneous use of traditional marketing channels

 Growth in the children furniture segment and smart-home furniture segment

Sources: GMA, 2021; IBIS, 2021

Based on a vision and mission, IKEA has selected a hybrid competitive

strategy that combines product differentiation with the low product price, enabling it

to provide a superior value to customers and ensure the fast market share increase

(Whittington et.al., 2020). To implement this strategy successfully, IKEA has created

a cost-efficient business model and extensively invests in R&D and marketing (IKEA,

2021). Yet, as its global strategy of standardisation has not been appropriate for the

Chinese market, IKEA has adapted its strategy to suit local customer preferences.

The suitability test has shown that IKEA’s competitive strategy addresses key

strategic issues from both external and internal environments. To address the

macro-environment strategic issue of the limited access to the Chinese market, IKEA

has selected a joint venture with Beijing Northern Sweden Limited Company as its

entry mode to China (Whittington et.al., 2020, p. 231). In this way, IKEA has

overcome the government rule that only domestic companies can work through

wholly-owned stores and mitigated the risk of entering a new, unknown market

(Johansson and Thelander, 2009). A joint venture has also helped IKEA to address

other important strategic issues, such as different government regulations, large

cultural diversity, and specific customer preferences (Whittington et al., 2020). Yet,

this entry mode has reduced IKEA's control over operations in China. Thus, when
 11

China has relaxed its policy on foreign investment, IKEA bought the shares of

partners and continued to work in China on its own (Dahlvig, 2011).

To address the micro-environment strategic issue of a strong rivalry in the

Chinese furniture industry, IKEA has selected appropriate blue ocean strategies

based on identified critical success factors. It has selected cost leadership as its

corporate-level strategy supplementing it with product differentiation. To align all

strategy levels, IKEA's business-level strategy is directed at producing a range of

designed and ready-to-assemble furniture and accessories at low cost, while IKEA’s

functional strategies aim to achieve supply chain and production efficiency through

vertical integration, as well as a strong brand using a mix of traditional and online

marketing channels (IKEA, 2021). To utilise opportunities of the fast-growing smart-

home furniture market, IKEA has introduced smart-home furniture enabling customer

connectivity through its Home Smart app (BD, 2019).

To address internal strategic issues, IKEA has adapted its offerings and

stores to specific customer preferences in China. Facing an issue of a high product

price for the Chinese market, IKEA has created a supply network in China

(Johansson and Thelander, 2009) to avoid high transportation costs and reduce the

product price. By using local sourcing, IKEA has also improved the reputation in the

Chinese market by showing social responsibility. Yet, it now depends on Chinese

suppliers, which makes it vulnerable to change in price, quality and speed of their

delivery (Grant, 2016).

IKEA has also adapted its stores to Chinese needs by building them close to

transportation hubs, introducing in-store design advice, and enabling fee-based

home delivery and assembly services (Burt et al., 2020). It has also opened small

stores in local shopping centres with furniture for small living spaces and time-limited
 12

pop-up stores which should entertain, surprise and inspire customers (IKEA, 2021).

IKEA also plans to introduce planning studios with free expert help for customers.

China’s IKEA stores have also localised the food in restaurants and even allowed

customers' noon nap on furniture, considering this common Chinese habit as product

trial and using it to promote the comfortability of its furniture (Levin, 2016).

Finally, although IKEA still uses its traditional promotion tools, like catalogues,

story-telling and showrooms, it now more focuses on online channels to reach tech-

savvy Chinese customers. Given a 67% increase in online sales, it invested 10

billion yuan in the digitalisation of its business in China (Zhuoqiong, 2020) and

opened the virtual IKEA store on Tmall with 3,800 products (GMA, 2021). Also, its

partnership with Alibaba enables it to reach more customers, create good

relationships with them, and learn how to meet their demands in a better way.

As IKEA considers stakeholders as an integral part of the company, it creates

the power/interest stakeholder matrix (Table 7) to determine their relative importance

and actions to satisfy their needs (Whittington et.al., 2020). The acceptability test has

shown that IKEA’s competitive strategy meets stakeholders’ expectations, reduces

their risks and provides them with acceptable returns, ensuring their positive

reactions to its strategy.

Table 7: Power/Interest stakeholder matrix

Low Level of attention High

 13

Sleeping Giants – Keep satisfied Key players – Actively cultivate

Competitors Shareholders
Auditors Customers
Civil society Employees
Government Suppliers
Power

Irrelevants – Minimal effort Gadflies – Keep informed

Consumer associations Labour unions
Investor associations Regulators
High
Low

Various interest groups Media and pressure groups

Moreover, the feasibility test has shown that IKEA has distinctive resources

and capabilities, innovative management, trained and motivated staff, stimulating

culture, and financial power to implement a chosen competitive strategy in China

successfully. Yet, given large cultural diversity, IKEA still learns through trials and

mistakes how to better understand the Chinese and fully adapt to their needs.

4. Conclusion and recommendation

From its first store opened in 1998 to the present day, IKEA has made great

progress in its business in China thanks to its innovative business approach and

rapid adaptation to cultural differences in this market. Although IKEA’s business in

China is now quite different from its other global businesses, which complicates its

business model and imposes new challenges, IKEA has proved once again that

innovation and adaptation to local conditions are key features for success in a

changing environment. Thus, as it still faces fierce competition and high uncertainty,

IKEA should continue to improve its business and prepare contingency plans for

different future scenarios (Whittington et al., 2020).

 14

If it fails to achieve its goals or circumstances change, IKEA must find a new

approach to its Chinese business, e.g. by reducing its product range only to products

that support its cost leadership strategy or by focusing more on its digital stores that

the Chinese love so much. Still, if it reaches more Chinese customers through digital

channels and online stores, IKEA should provide them with the same unique

shopping experience online as in its stores to strengthen a brand further and thus

neutralise competitors and overcome threats of counterfeit. To retain its competitive

advantage of low-priced products, IKEA needs to reduce dependence on Chinese

suppliers by creating their good relationships to ensure stable and timely

procurement of quality raw materials at low price. Moreover, to reduce external

threats, IKEA should continue to comply with strict government regulations and

nurture its sustainable approach to business to reinforce the reputation of a socially

responsible company.

Therefore, to retain competitive advantages in China and remain a leader in

the global furniture industry, IKEA should regularly evaluate the suitability,

acceptability and feasibility of its strategy and adopt improvements in resources and

capabilities in line with local needs and changes in the external and internal

environment.
15
 16

References

BD (2019). Ikea’s 2020 Strategy Focuses on Smart Home Automation. Born Digital.

[online]. Available at: https://www.borndigital.com/2019/12/19/ikeas-2020-

strategy-focuses-on-smart-home-automation [Accessed 12 April 2020].

Burt, S., Dawson, J., Johansson, U., and Hultman, J. (2020). The changing

marketing orientation within the business model of an international retailer –

IKEA in China over 10 years. The International Review of Retail, Distribution

and Consumer Research, 31(2), 229-255.

Dahlvig, A. (2011). The IKEA Edge: Building Global Growth and Social Good at the

World's Most Iconic Home Store. McGraw Hill.

GMA (2021). Furniture Market in China: Market Overview as of 2020. GMA. [online].

Available at: https://marketingtochina.com/furniture-in-china-the-epic-guide-to-

sell-to-chinese-consumers/ [Accessed 7 April 2020].

Grant, R. M. (2016). Contemporary Strategy Analysis: Text and Cases Edition. John

Wiley & Sons.

IBIS (2021). Furniture Stores Industry in China. IBIS World. [online]. Available at:

https://www.ibisworld.com/china/market-research-reports/furniture-stores-

industry/ [Accessed 7 April 2020].

IKEA (2021). About us. IKEA. [online]. Available at: https://about.ikea.com/en/about-

us [Accessed 5 April 2020].

Johansson, U. andThelander, Å. (2009). A standardised approach to the world?

IKEA in China. International Journal of Quality and Service Sciences, 1(2),

199-219.

Levin, D. (2016). Shh. It’s Naptime at Ikea in China. New York Times. [online].

Available at:
 17

https://www.nytimes.com/2016/08/27/world/what-in-the-world/shh-its-naptime-

at-ikea-in-china.html [Accessed 10 April 2020].

Shoulberg, W. (2018). Why Ikea Succeeds Around the World While Other Retailers

Falter. Forbes. [online]. Available at:

https://www.forbes.com/sites/warrenshoulberg/2018/07/30/put-another-stamp-

on-the-ikea-passport/?sh=69db99cd3f7c [Accessed 8 April 2020].

Whittington, R., Regnér, P., Angwin, D., Johnson, G., and Scholes, K. (2020).

Exploring Strategy - Text and Cases. 12th edition. Pearson Education.

Zhuoqiong, W. (2020). Ikea launches its 1st mobile app in China. China Daily.

[online]. Available at:

https://www.chinadaily.com.cn/a/202001/07/WS5e143dbba310cf3e35583022.

html [Accessed 10 April 2020].